Responsible Investment in action 03
Responsible Investment in Action
Update on the activities of the Global Responsible Investment (GRI) Team at Aviva Investors.
Only by driving ESG (Environmental, Social and Governance) issues up the investment industry’s agenda can we build a better future for our clients.
World Benchmarking Alliance
The positive impact of ESG integration on the corporate balance sheet is becoming more apparent, even as its actual impact on the world we live in remains almost invisible. We lack a framework for assessing how investors contribute to this impact. We also lack a transparent, robust and accountable global methodology for measuring corporate impact on ESG issues. This is where the World Benchmarking Alliance (WBA) comes in. The WBA – launched in September by its three founding members: Aviva, the United Nations Foundation and Index Initiative – already has the support from a diverse group of more than 70 WBA Allies including ABP, Investec, ABN Amro and World Wide Fund for Nature and ShareAction. The UK, Dutch and Danish governments are providing financial backing.
The private sector has a crucial role to play in advancing the Sustainable Development Goals (SDGs), but to boost companies’ motivation, there needs to be real change in the way that their impact is measured. That’s why the WBA has set out to develop transformative benchmarks that will compare companies’ performance in alignment with the SDGs.
The aim is to empower all stakeholders, from consumers and investors to employees and business leaders, with key data and insights to encourage sustainable business practices across all sectors. While the WBA’s series of benchmarks won’t be the first nor the most comprehensive ESG league tables or scorecards currently available, there are clear differences that may help propel it on to more investor portfolios:
- The WBA league tables will be free and publicly available, so anyone can access them.
- The league tables will be based on benchmarks that have been built collaboratively with a broad range of stakeholders.
- Companies can’t opt-in or opt-out – they will be ranked whether they like it or not. This will level the playing field and encourage transparency in what advocates hope to be ‘a race to the top’.
- Support from a broad range of some of the world’s largest institutions, companies, policymakers and non-profit organisations should help ensure that the underlying information is robust, the analysis consistent and the methodologies comparable.
The first set of benchmarks will be published in 2020, addressing food and agriculture, climate and energy, digital inclusion, and gender equality and empowerment.
During the quarter we voted on 5,400 proposals at 616 company meetings.
We voted against management at 19% of management proposals.
Infrastructure: why governance is a critical consideration
ESG integration in practise – Infrastructure
Traditionally, private operators of infrastructure and public services have focused on demonstrating their environmental credentials as the primary measure of their responsible practices. While this remains a critical consideration, more emphasis should be given to the governance of their operations, which provides the overarching framework of their conduct and behaviour. This may be in part due to a misconception that governance is an issue for public rather than unlisted private companies and entities.
However, good governance is essential in the delivery of long-term value. For businesses to remain sustainable and flourish, they must acknowledge their role in the broader environment in which they operate, and endeavour to develop deep and positive relations with customers, government agencies, suppliers, employees and communities.
Although infrastructure remains a unique asset class, the impact of ESG to the sector is inescapable. In due course, it will mean that the myopic pursuit of maximising short-term profits at the expense of building stakeholder value may hurt corporate competitiveness in the long term, while entities unable to demonstrate strong ESG credentials may be starved of capital or be required to pay a substantial risk premium.
Here are some insights from Darryl Murphy, Head of Infrastructure Debt:
What role does infrastructure play in addressing key sustainability challenges?
We would define infrastructure as the assets necessary to support economic growth and deliver essential services to society. Infrastructure remains one of the great global challenges of the 21st century and has been explicitly linked to the delivery of the SDGs e.g. sustainable growth, transition to a low carbon economy, resilience to climate change, urbanisation and reduction of poverty. These factors are common across the globe and governments are facing up to the challenge of how this infrastructure is paid for, financed and delivered.
With an increasing focus on ESG and climate change, how do you see your industry developing going forward?
Infrastructure development is naturally very well aligned to ESG and climate change although the focus for many years has been on the “E” e.g. the transition to a low carbon economy and the significant investment in renewable energy. However, the UK is currently witnessing an existential debate on the role of private finance within the infrastructure sector. The industry is now coming to terms with the challenge of restoring its social licence to operate and how public confidence can be rebuilt in infrastructure providers such as water utilities and train operators. This will involve investors more proactively promoting higher governance standards and demonstrating the critical role of private finance in funding the delivery of essential public services.
What are the differences in sustainability considerations across markets?
In the UK, the main focus on sustainability has been around investing in decarbonising our economy, this has been translated to a huge shift to renewable energy, an increase in low carbon transport solutions and improving resilience such as flood defence. We have also seen some strong environmental investments such as the Thames Tideway Tunnel to improve the water quality of the Thames. These issues are fairly common across Europe. But as we look to developing markets in the Middle East, Africa, Latin America and Southeast Asia, the considerations often include factors more fundamentally linked to basic social needs such as the provision of energy, clean water and public transport. One of the interesting challenges for the future is how sustainable investments in technology will impact infrastructure as we see the increase in electric/autonomous vehicles, broadband/5G and battery storage.
What lessons can be learnt from the public equity markets on ESG integration?
The infrastructure market is predominantly a private market, and in the absence of shareholder scrutiny, the external pressure is more likely to come from end investors in infrastructure. These investors are international institutional investors and pension funds who are increasingly building ESG integration in investment decisions and demanding more information on their investments. Fund managers need to demonstrate their ESG credentials or risk being left behind.
The latest issue of AIQ magazine explores some of the most critical themes in the world of ESG. Our cover story focuses on the biggest question for investors: can you do well out of doing good?
Did you know during the quarter some of the topics we engaged with companies on were climate change, board composition, succession planning, remuneration, deforestation, plastics?
During the quarter the GRI team engaged on 215 occasions with companies as part of our stewardship responsibilities.
Animal Welfare – Burberry
Earlier in the year we wrote to Burberry encouraging them to cease sourcing and using fur in their products. In June we met in person with the company and discussed the issue. They explained their approach and that this was under review. In September we were pleased to hear Burberry announced they will begin phasing out the use of real fur products across all its ranges.
Cybersecurity – British Airways
British Airways (BA) announced on 6 September that it had been the victim of a cyber-attack. Cyber criminals had stolen the financial details of 380,000 customers in a breach of the company’s website and mobile app. This was the first major data breach since the General Data Protection Regulation (GDPR) came into force in the European Union in May 2018. Under GDPR, BA was under the obligation to disclose the data breach within 72 hours, with a potential fine of up to 4% of global revenues if they fail to do so.
With cyber incidents increasing in frequency and severity, we think investors should monitor cyber security risk more closely. It is not a matter of whether a business will be attacked, but when. Therefore, it is key to evaluate companies’ resilience on this issue and is a regular topic for our engagement. In the year prior to GDPR coming into force, we started regular dialogue with companies to understand how they were preparing for the biggest changes relating to transparency of data collection and storage, and consumers ‘right to be forgotten’.
When engaging with companies on cyber security, we want to understand to what extent companies have evaluated their exposure as well as how they manage the risk. Our approach is articulated on two pillars: whether the company has a risk-based framework and whether they have the appropriate governance of this risk.
Board Independence - Ryanair
We are strong supporters of Ryanair’s business model, which has delivered sustained positive returns to shareholders over the last decade. However, we have concerns with the leadership of the business which has allowed for a fundamental breakdown of relationships with a large number of employees, resulting in significant disruptions to operations. This has been in part attributed to a board lacking in independence and unable to provide robust oversight of management. At the 2018 AGM, we expressed our concerns by voting against the re-election of the chairman, the senior independent director, and five other non-executive directors. Almost 30% of shareholders also voted against the long serving chairman who we expect to stand down in the near future. We will continue to engage with the company to encourage the rebuilding of a board with the appropriate level of independence, expertise and diversity. This will better position the board to navigate the uncertainties of Brexit, elevated fuel prices, and the transition to a unionised workforce.
Governance - Sports Direct
We voted against a number of resolutions at the Sports Direct AGM in September, including the re-election of Keith Hellawell as chairman and Mike Ashley, CEO and founder. We have not supported the re-election of the chairman since 2014, reflecting a catalogue of corporate governance problems. Meetings we have had with the chairman fell short of our expectation of a large FTSE company. Our vote against Mike Ashley reflected our concerns that, as the central figure of Sports Direct, he is interlinked with what we considered to be ongoing concerns over the operational management, governance and risk oversight of the company. These are key factors behind the material failings that came to light in 2015 regarding some of the company’s workplace practices.
We welcomed the decision that both the chairman and the senior independent director would step down shortly before the 2018 AGM. The new chairman and other recent announcements to the board should improve the functioning of the board. Some operational improvements have also been noted at the company, e.g. a workers’ representative has been appointed to attend board meetings. The company also stated that it conducted a wage review, is undertaking rolling dialogue with staff, is changing hours for casual workers and is introducing a health and wellbeing service for staff.
However, we remain uncertain over the long-term commitment of the company towards better governance and stakeholder relations. Two days after the AGM, Mike Ashley claimed to have been stabbed in the back and that “shareholders have now made it extremely challenging for future engagement to take place.”
China Trip - Climate change
High quality and timely information about climate and environmental risks are central to improving the ESG credentials of financial markets. Building on the strategic partnership between the UK and China at the G20, a new pilot programme involving 10 financial institutions on The Task Force on Climate-related Financial Disclosures (TCFD) and environmental risks was announced in December 2017. The pilot will run for three years, and provide a platform for experience sharing and information exchange amongst financial institutions and market regulators.
As part of this initiative, Aviva Investors participated in an investor delegation from the UK to Beijing. We met with multiple utility and financial services companies as well as regulators to discuss the investment relevance of climate risk and outline our expectations for disclosure.
Part of our role as a responsible investor is to help correct market failures by voicing concerns about ESG issues to governments and regulators around the world. Find out more about initiatives from this quarter below.
Our engagement with policymakers helps drive measures to integrate sustainability into financial markets.
We continue to engage proactively with policymakers, other industry representatives and organisations to develop more sustainable capital markets. Our work on both the EU High-Level Expert Group on Sustainable Finance and the UK’s Green Finance Taskforce has contributed to proposed regulatory changes at both EU and UK level.
Europe continues to take a lead on sustainable finance regulation, with a number of proposals that stand to increase the responsibility of asset owners and managers to manage and disclose sustainability risks, as well as to incorporate clients’ ESG preferences in suitability requirements. European supervisors are also reviewing whether more guidance could be given to regulated entities on how to deal with ESG factors. We also expect the UK government to respond shortly to the recommendations of the Green Finance Taskforce, strengthening UK regulation on ESG issues.
Commission request for ESMA and EIOPA advice on ESG integration
The European Commission announced in its Sustainable Finance Action Plan the intention to revisit level 2 regulation for UCITS, AIFMD, MiFID, Solvency II, and IDD to set out requirements to integrate ESG into investment decision-making processes. These are the key pieces of European legislation that underpin the whole investment chain for both asset managers and asset owners, and the request for technical input makes clear the commission’s intention to require “relevant sustainability risks” to be integrated into:
- organisational requirements of firms, including risk management and governance;
- operating conditions, in particular investment strategy and asset allocation; and
- risk management.
Meet the Team
In each issue of this newsletter, a member of the GRI team tells us about themselves and their role at Aviva Investors. For this quarter meet Rick Stathers, Senior ESG Analyst in the GRI team.
Rick Stathers discusses how ESG integration is evolving
Q. How long have you been at Aviva Investors and the responsible investment industry in general?
I joined Aviva Investors in August 2018 from CDP. At CDP I was the global director of the investor initiatives programme, overseeing the research output of the team and managing the relationships and expectations of the 600+ investor organisations that are signatories to the CDP. Prior to that I was the head of responsible investment at Schroders, where I had started as an ESG analyst in 2000. I was the architect for Schroders responsible investment approach for those 16 years, overseeing integration, research and engagement. I have been very fortunate to join the SRI industry at an early stage and as a result have been a founding member of the Institutional Investors Group on Climate Change, the Pharmaceutical Shareowners Group (now Access to Medicines) and the Extractive Industries Transparency Initiative.
Q. What attracted you to Aviva Investors?
Several reasons. Aviva has a very good reputation in the industry, especially within the public policy space and I have been particularly impressed with the public comments on climate change. There is a great opportunity to learn here, especially given the challenges that the insurance sector faces with regards to climate change (and ecosystem decline). Having spent the last two years managing a global team, I wanted to get back into the weeds and do some more research, writing and thinking.
Q. What is your current role?
I am a senior ESG analyst in the GRI team. I am covering the industrial sector with Nathan Leclerc and the utilities sector with Natalia Rajewska. I’ll be working with them and the analysts and fund managers on furthering the integration of ESG factors into the investment process. I am also responsible for reviewing and inputting in to the evolution of Aviva Plc’s climate change strategy and working with colleagues on our Task Force on Climate-related Financial Disclosure response.
Q. What do you enjoy the most?
The thing that I have enjoyed most over the last two decades is broadening my understanding of the investment process and developing solutions for the effective integration of ESG externalities and the consideration of environmental limits into it. Examples include engaging with chief economists over their failure to integrate the impact of climate change into their forecasts and working with fund managers and financial analysts on their considerations of ESG factors in their valuation process.
Q. Most challenging part?
Working with fund managers and analysts on the integration of ESG factors into valuations and stock selections. It is one of the aspects of my job that I enjoy the most, and find most challenging.
Q. What ideas are currently being debated that have the capacity to drive dramatic change?
Market wide adoption of science-based targets for emissions reduction. Over the years I have seen the debate move from ‘can you publish an environmental policy’, to ‘can you publish environmental data’, onto ‘can you set an emission reduction target that is absolute’ and now to ‘can you set a science based emissions reduction target’. With two years to go until emissions have to peak (and then decline by 50% per decade after 2020) in order to have a chance of avoiding 2C of global warming, companies setting a science-based target demonstrate to investors a more precise level of commitment to below 2C. The target also may help provide an emissions pathway (for their value chain), against which stakeholders can measure performance.
Q. If you are not working, where can you usually be found?
In the garden shed, recycling or building something for my daughter (I have just recycled an old pallet into a deck chair for her), or in the garden implementing syntropic gardening ideas. Syntropic gardening is a system that’s generally based on maximising efficiency by exploiting interdependent plant relationships.
Q. Tell us a fact about you that not many people know?
I speak basic Kiswahili.
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